Does Sri Lanka need micro finance?
There are few key fundamental elements one should ensure in best practice micro finance aimed at poverty reduction. They are collateral-free credit, credit-plus services like enterprise development and motivation training, and affordable interest rates for loans whilst ensuring sustainability of the agency.
Amongst the key decision makers in the government, both political and bureaucratic, there are two major schools of thought on the need for micro finance. One is that Sri Lanka should focus on small and medium business and the formal sector and that this is enough to alleviate poverty. This is the route that countries like China, South Korea and few South Asian countries followed with success. Another school of thought believes that government-driven micro finance is adequate and that Samurdhi and Divi Neguma, etc are doing an adequate job and hence any poverty focused NGO work is not required. Yet another belief especially by lawyers in the Central Bank and such decision making bodies is that NGOs cannot be trusted to take savings or foreign loans.
This and other reasons have resulted in Sri Lanka being one of the few countries in South Asia with no Micro Finance Policy or Regulatory Framework. It has also resulted in micro finance having a major mission drift with most expansions in the last few years been by finance and leasing companies, majority of whom charge an interest rate of 28 per cent flat. This in turn resulted in a response by the Government Agent of Batticaloa and a prominent politician in the district who have stepped in to the fray to send a circular that interest rates should be 12 per cent and other conditions. This in itself is not a wise move though some of the reasons for this move is justified as this can lead to chaos since tomorrow another GA can say the interest rate should not be more than 6 per cent. This will lead to the withdrawal of many agencies in the private and NGO sectors. Already some finance and leasing companies have decided to withdraw from Batticaloa. This in turn will have serious consequences on the poor as over 50 per cent of households receive credit from private sector/NGO efforts. If interest rates charged by some sectors are too high a national level decision must be taken after consulting all stakeholders and coming to an amicable decision based on cost/margin analysis. What is amusing in this scenario is that the high interest rate which is the main concern of the GA and others are created by so called regulated agencies and not NGOs.
Going back to the arguments raised by a few key bureaucrats on micro finance as stated in the first paragraph. The first argument is that SMEs and the formal sector with industrialisation are adequate and a focus on micro finance is not critical for poverty alleviation. Let us look at this from two fronts; first the role of micro finance in poverty alleviation. Since the mid 1980s formal micro finance played a major part in poverty alleviation in Sri Lanka. This was first owing to NGO efforts due to SEEDs and Janasaviya Trust Funds and cooperative efforts due to the re-structuring of Sanasa. Then came the government programme – Samurdhi micro finance. It is difficult to identify the extent of poverty reduction from micro finance due to the lack of studies and due to the fact that many variables go into reducing poverty. However as the writer was founder CEO of SEEDs, the largest NGO micro finance programme and Berendina, the foremost NGO programme now, we personally know hundreds of families who started with a small loan of Rs.10,000 and now possess vans, have over 10 staff and have successfully educated children due to prospering from increased loans and credit plus services given by these agencies. Though there are no major significant studies on the impact of poverty on micro finance in Sri Lanka one needs to look at the World Bank Economic Review Vol 19 No.2 titled Poverty and Microfinance “Evidence Using Panel data” and the study “Dynamic Effect of Micro Credit in Bangladesh” both done by World Bank economist Shadidur R. Khan and published in the World Bank Economic Review which shows the impact of micro finance in reducing poverty in that country. In the first publication, he states as follows, “The results indicate that micro finance accounts for more than half of the 3 per cent points annual reduction in poverty amongst participants of micro finance programmes.” On the second argument that SMEs and formal sector is adequate to reduce poverty – unfortunately even despite peace since 2009 the country has not attracted anywhere near the FDI received by South East Asian countries and nor has it succeeded in ensuring the SME sector grew to the extent desired.
On the argument or belief that government micro finance is adequate –Samurdhi to its credit has reached over 700,000 families with savings and credit. However it also has the dubious honour of being one of the few micro finance programmes in the world which is subsidised by the government. In a sector where even NGOs can do sustainable micro finance it is indeed a pity to continue Samurdhi/Divi Neguma in this form with an annual subsidy of over Rs.1 billion for salaries and other expenses. Both programmes are not transparent and have poor repayment records in a sector where good repayment means 98 per cent. The Government’s responsibility is to create an enabling environment for pro-poor micro finance and not to try and implement same.
On the argument that NGOs cannot be trusted with savings and foreign loans, we only have to look at Bangladesh where NGOs have over US$ 2 billion in savings with them and some operate programmes with 8 million clients! That too with low interest rates equivalent to around 13 per cent, no subsidies and profitably! In this context the Berendina Micro Finance Institute the writer now heads issues loans at around 12 per cent and yet made a profit of Rs.40 million in 2013. Even in Sri Lanka, non regulated MFIs mobilised deposits until the Finance Business Act 2011 made deposit mobilisation an offence without licences. None of these NGOs failed to return the deposits to the borrowers or failed them. But a significant number of regulated finance companies and banks failed to do so making thousands of families in trouble particularly a large number of senior citizens in the country. Finally the purpose of micro finance should not be profit but poverty alleviation and micro finance is only one tool in the efforts to reduce poverty.
The Government to its credit has assisted poverty reduction and ensured that only 6 per cent is now below the poverty line. But what is this poverty line? It is Rs.15,000 for a family of four. Would most readers think that anyone who earns Rs. 17,000 a month and has a family of four be considered middle class or rich? Hence Sri Lanka has to go a long way in poverty reduction assuming a family of four needs Rs.40,000 to live as stated by the Census and Statistics Department. Secondly by giving monthly allowances to over 30 per cent of families through Samurdhi, the Government itself agrees that there is many more poor families than a mere 6 per cent .
Hence as Basil Rajapaksa, the Minister of Economic Development, stated at a recent meeting with the Micro Finance Network, we need all hands on the wheel to reduce poverty. We need finance companies, we need SMEs and we need Government programmes as well as poverty-focused NGO micro finance programmes. Hence I sincerely appeal to the Cabinet, Central Bank and Treasury not to allow a mission drift in micro finance but to create an environment where all can play a part to assist the government to reduce poverty
(The writer is Chairman of Berendina Micro Finance Institute and Berendina Development Services and is a freelance consultant in poverty reduction. He holds a MBA from Florida State University).